Do Bidding Procedures Matter?

I’m just back from the American Law and Economics Association annual meeting, and the big topic of discussion was Chrysler’s recently approved bidding procedures. In particular, virtually everyone I spoke with was dismayed by the requirement that a bidder assume the debtor’s collective bargaining agreements in order to become a “Qualified Bidder.”

The inclusion of this requirement, which I assume was dictated by either the administration or the union, was not real smart. It smacks of overreaching, and is totally unnecessary.

In particular, I doubt that the bidding procedures are of any practical value in this case because I doubt there is another bidder ready to bid more than $2 billion for the Chrysler assets. Bidding procedures sometimes have practical effects, but only in situations where a credible bidder emerges with a truly comparable offer. And in those cases the bidder has incentives to challenge the bidding procedures, and the court can modify the bidding procedures to maximize return to creditors. See, e.g., In re Financial News Network, Inc., 126 B.R. 152 (S.D.N.Y. 1991) (bankruptcy court erred in not considering nonconforming bid worth an additional $10 million to creditors); In re Wintex, 158 B.R. 540 (D. Mass 1992); In re Edwards, 228 B.R. 552 (Bankr. E.D. Pa. 1998).

In short, I think a lot of the concern about the bidding procedures may assume that the procedures have more “stickiness” than they actually do.  Given the evident flexibility of these procedures, I also don't put too much weight on the argument that the procedures may have deterred potential bidders.  Anyone who is going to top a $2 billion bid does not need a junior-grade law professor with a blog to tell them that all they have to do is put real money on the table to get the procedures modified.

That said, this entire debate could have been avoided if this unnecessary provision was not included in the procedures in the first instance. And putting the assumption requirement in the procedures just furthers the (typically) unwarranted argument that chapter 11 is something that should be avoided like the plague.